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Fonterra foresees dairy price revival, even as it slashes milk payout

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Fonterra forecast a recovery in "unsustainably low" dairy prices, even as it slashed its forecast for payouts to farmers this season to the lowest in 13 years, and slashed its investment budget.

The New Zealand-based co-operative, the world's top milk exporter, cut to NZ$3.85 per kilogramme of milk solids, from NZ$5.25 per kilogramme of milk solids, its estimate for its payment to farmers for milk in 2015-16.

The downgraded estimate matched the payout in 2005-06, the smallest since 2002-03, when Fonterra paid producers NZ$3.34 per kilogramme of milk solids.

Fonterra chairman John Wilson blamed the reduction on the "continued significant imbalance" in the world dairy market between "weak demand and surplus supply", dynamics which cut prices at the benchmark GlobalDairyTrade auction this week to a 13-year low.

'Unsustainably low'

"This imbalance and the challenge of lower prices continuing for longer than anticipated is a global issue, which dairy farmers around the world are increasingly grappling with," Mr Wilson said.

However, he added that dairy values were "unsustainably low", reaching levels which were starting to prompt production cuts.

The co-operative reduced its estimate for output this season in New Zealand, the top milk-exporting country, to 1.589bn kilogrammes of milk solids, a 2% decline year on year.

"We have confidence that prices will recover over the course of the season," Mr Wilson said.

"We know the global dairy market will improve. The hard thing to call at the moment is exactly when and how quickly."

The current market consensus is that price recovery will not kick in until 2016, although some commentators, such as Bank of New Zealand, foresee hope for revival beginning late this year.

'Major operating losses'

The downgraded figure takes milk prices well below the cost of production for New Zealand farmers, which industry group DairyNZ estimated at NZ$5.40 per kilogramme of milk solids, a downgrade from its previous estimate of NZ$5.75.

"For the average farmer you are looking at covering a business loss of NZ$260,000-280,000 this season but for many it will be a lot more than that," said DairyNZ chief executive Tim Mackle.

"We calculate around nine out of 10 farmers will need to take on extra debt to keep going through some major operating losses."

Fonterra said it was offering farmers the chance to receive an extra NZ$0.50 per kilogramme of milk solids in payment in the form of an interest-free loan, to be repaid when the price goes back above NZ$6.00 per kilogramme of milk solids.

The co-operative, saying that the move is expected to cost up to NZ$430m for the June-to-December period alone, said that it had cut its capital expenditure budget, and was not forecasting a cut of NZ$500m-600m in spending year on year.

It has already announced 500 job cuts, and is expecting further redundancies.

'Boost to farmers' confidence'

The cut in milk prices is of large importance for the New Zealand economy, for which dairy is a huge export earner, although low values are causing pain for farmers in many countries, sparking protests in countries such as Belgium, France and the UK.

DairyNZ said that the reduction in the payout meant "NZ$2.5bn dropping out of local economies".

Nonetheless, the New Zealand dollar was showing small gains against the dollar on Friday, of 0.2%, a rise attributed in part to the fact that the Fonterra price downgrade had been expected, but also to the farmer support package.

ASB said the support would "definitely be a boost to farmers' confidence".

By Mike Verdin

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